The recent strong development of the bond market could adversely affect the private sector because most of the buyers are banks that will consequently have less funds to lend, experts say.

Last year, some VND160 trillion (US$7.65 billion) worth of government bonds were sold, almost twice that of 2011, according to the Ministry of Finance.

Transactions of government bonds on the secondary market jumped almost threefold to hit VND842 billion on average per session.

Banks bought 90 percent of the bonds, and securities firms and other businesses accounted for the rest.

Since early this year, government bonds worth VND43 trillion have been sold, the ministry said.

Government bonds have become attractive to commercial banks because inflation and foreign exchange rate have been kept stable, and credit growth had remained low.

Vietnam saw credit decrease of 0.16 percent in the first two months of this year, while banks' deposits rose by 1.84 percent, according to the State Bank of Vietnam.

Sluggish credit activity has forced commercial banks to pour their capital into other investment channels. Given the frozen property market and risk involved in gold, government bonds have become their investment choice, said Trinh Quang Dung, an analyst with the Vietcombank Securities Company.

However, in this situation, when banks with limited funds increase their funding for the public sector, the private sector could be starved for funds and many firms might even be forced to shut down their production and business, Dung said.

Furthermore, to compete in the capital market, government bonds would have to offer attractive interest rates to lure investors. In the first two months of this year, annual interest rates of 8.2-9.3 percent were offered on government bonds.

Though these rates are often lower than deposit interest rates offered by commercial banks, the latter are choosing to buy bonds because they have little choice, given the sluggish business in both mobilizing funds and lending them.

Also, given the high bond rates, commercial banks will not reduce lending interest rates to below 10 percent as firms expect.

Deputy Minister of Finance Tran Xuan Ha said the government bond market still heavily depends on commercial banks, as it has not attracted other institutional investors, for example investment funds. Thus, it is difficult for the market to mobilize long term capital, as most of banks' funds are short term.

Economist Bui Kien Thanh said the participation of few institutional investors in the market is a big shortcoming, which shows that they and individual buyers are mainly speculators.

"They buy stocks today and sell them in the next one or two weeks only to earn profit. They don't care about government bonds with fixed interest rates of only just 9-10 percent each year."

Nguyen Minh Phong, another economist, said it is normal for an economy to mobilize capital from banks and the capital market. However, the capital market in Vietnam is still in a fledgling stage, pushing the government to mobilize capital through bonds.

The Asian Development Bank in a recent report said the fastest-growing bond market in emerging East Asia in 2012 was Vietnam, 42.7 percent bigger than at end of 2011, largely due to the rapid expansion in the country's government bond market.

The local currency bonds grew most rapidly in the fourth quarter experienced the most rapid growth in the region, expanding 42.7 percent to $25 billion year on year and up by 17.6 percent from the previous quarter. The government bond market was up 54.6 percent year on year to $24 billion, mainly due to an increase of 71.5 percent in the issuance of treasury bills and bonds. The corporate bond market, however, contracted 47.6 percent year on year to $1 billion, continuing a steady decline since March 2011.

Economist Thanh said that the government should improve the legal framework for the bond market to make the non-government bond segment more attractive to investors.

As of now, there are no rules that allow investors to monitor or supervise the use of capital by non-government bond issuers, making them more risky.

The absence of a credit rating organization to assess firms has been another stumbling block in the development of the non-government bond market, Thanh said.